Download chapter 16 - comparative advantage

CHAPTER 16 - COMPARATIVE ADVANTAGE
AND THE GAINS FROM INTERNATIONAL TRADE
PROBLEM SET
2.
a. The price will be $250 per VCR and 250 VCRs will be sold at that price. (If you
plot the supply and demand curves you will see that this is true.)
b. Domestic consumption will be 400 VCRs. Of that total, 100 will be produced in
the Marshall Islands and the remaining 300 will be imported.
c. With the tariff, the price of imported VCRs in the Marshall Islands will rise to
$200. The demand schedule tells us that 300 VCRs will be purchased, and the
supply schedule tells us that 200 will be produced domestically. The remaining
100 will be imported.
d. Tariff revenue is $100 per VCR  100 VCRs imported = $10,000
e. A quota that allows 100 VCRs per year into the country will drive the price of
VCRs to $200, where, as with the tariff, 200 will be produced domestically and
300 will be bought. The difference between the quota and the tariff is that
government collects $10,000 if the tariff is imposed, but nothing with the quota.
4.
When the tariff is imposed, the price in the EU will rise by the amount of that tariff to 4
euros per pound. (This assumes that the EU is not large enough to be able to influence
the world price on its own.)
a. From the Quantity Supplied column of the table, we see that EU producers will now
supply 40 million pounds monthly.
b. EU consumers will demand 120 million pounds per month
c. The EU will import 120 – 40 = 80 million pounds monthly.
d. The governmental authorities will collect 2 euros/pound x 80 million pounds
imported = 160 million euros per month.
6. The following table summarizes this situation:
United States
Soybeans
T-shirts
(million bushels)
(millions)
Change in
+100
-200
Production
Exports (-) or
-80
+200
Imports (+)
Net Gain in
+20
0
Consumption
China
Soybeans
T-shirts
(million bushels)
(millions)
-50
+250
+80
-200
+30
+50
Chapter 16 Comparative Advantage and the Gains from International Trade
a. From this table, it is evident that China still gains from trade. As a result of
specialization (in T-shirts) and trade with the U.S., China is able to increase its
consumption of both soybeans (+30 million bushels) and T-shirts (+50 million).
b. The U.S. also still gains from trade, after specializing in soybean production.
After trade with China, the U.S. enjoys an increase of 20 million bushels of
soybeans.
c. China is better off with the new terms of trade. With those new terms, it enjoys
the same increase in soybean consumption (+30 million), but the increase in Tshirt consumption (+50 million) is larger than it would be under the old terms of
trade (+10 million).
d. The U.S. fares better under the old terms of trade. Under the new terms of trade,
free trade with China leads to the same increase in soybean consumption as before,
but free trade no longer increases T-shirt consumption in the U.S.
8.
T-Shirts
(millions)
T-Shirts
(millions)
United
States
B′
China
500
400
260
250
C
240
C
+10
A′
+40
200
A
+40
B
100 140
200
+10
50
Soybeans (millions of bushels)
.
100
Chapter 16 Comparative Advantage and the Gains from International Trade
10.
a. The PPFs are as shown in this diagram.
Wool
(millions
of tons)
New
Zealand
Wool
(millions
of tons)
India
B
30
20
15
A′
A
10
B′
2.5
5
10
5
Rugs
(millions)
Rugs
(millions)
b. New Zealand’s pre-trade production is at point A in the left diagram; India’s is at
point A’ in the right diagram.
c. New Zealand’s production after trade opens up is depicted at point B, where it
specializes in wool. India’s is at point B’, where it specializes in rugs.
MORE CHALLENGING QUESTIONS
12.
a.
The supply and demand curves look something like these:
Country A
Country B
Price
Price
export
S
5
4
7
5
import
D
6 7
10
Quantity
6
8
10
b. The pre-trade domestic price is $4 per unit in Country A and $7 in Country B. The
Quantity
Chapter 16 Comparative Advantage and the Gains from International Trade
equilibrium quantity is 7 units in Country A and 8 units in country B.
c. When trade opens, the world price will have to settle somewhere between $4 per unit and
$7 per unit. At prices above $4 per unit, Country A has an excess domestic supply. At prices
below $7 per unit, Country B has an excess domestic demand. Therefore, we can conclude
that Country A will export good X and Country B will import it.
d. Once trade opens, the world price will be $5 per unit. We find this equilibrium world price
by looking for a row in the demand schedules of countries A and B where, at the same price,
the differences in quantity supplied and demanded in countries A and B exactly offset each
other. At $5, Country A will produce 10 units, consume 6 units, and export 4 units to Country
B. At the world price of $5 per unit, Country B will produce 6 units, consume 10 units and
import 4 units from Country A.
e. As compared to the pre-trade situation, consumption in country A will fall while production
there will rise.
f. As compared to the pre-trade situation, consumption in country B will rise while production
there will fall.
g. Country A will export 4 units to Country B.
h. See the graphs in part (a) of this problem